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McLEAN AND CO.
McLEAN AND CO SEPTEMBER
2004 NEWSLETTER PAGE 2
When investment returns are more modest, investors are invariably
tempted to consider higher interest alternatives.
However, be sure to look before you leap. If
an investment sounds too good to be true, it may just be.
McLean and Co., and no doubt many of the readers, have received a
number of emails from "official" sounding people from the
have no investment statement or prospectus.
promise very high returns
say the scheme must be secret in order to succeed.
give a few or no details about the issuer and how the money is to be
are "private" offers open only to a select few
claim that the investment is "safe" or "risk free"
refer to "top world banks" or "prime banks'
If you are approached with an
investment that is too good to be true, you can see if it listed about
dubious investment schemes published on the Securities Commission
OR FLOATING YOUR MORTGAGE
When property investors
make this critical financial decision, they normally make one of three
One of the normal
consequences of a fixed rate mortgage is that if you break it or if you
pay it off earlier you are liable for early repayment penalties.
Even profound economists
are unable to consistently predict every event that may significantly
influence interest rates. So how do we continually get the lowest
possible interest rate on our mortgage. The short answer to
that is- we can't.
If we do choose to simply
take a long-term low fixed rate, we are exposed to the risk that when
our fixed rate expires, we may face a large rate increase, which we may
not be able to afford.
Many people opt for a
floating rate (when floating rates are low) and sometimes will incur
early repayment penalties to break fixed rates so they can enjoy a lower
floating rate. Their intention is usually to watch interest rate
levels and take a fixed rate if rates start to increase. This reflects a
somewhat short-term to a long-term mortgage commitment. If
interest rates start to increase, for example, and you take a fixed
rate, you may find a few months later that those rates are back down- or
worst still, considerably lower than when you decided to take a fixed
Other people split their
mortgage between fixed and floating in an effort to minimise a total exposure to the
risk of floating and fixed rates both rising.
McLEAN AND CO SEPTEMBER 2004
NEWSLETTER PAGE 3
Net Worth of Homeowners vs. Renters
How your mortgage helps you build wealth?
Here’s how it works. Say your $170,000 home
appreciates at that 6% annual rate. In 10 years, your house would be
worth more than $304,000. That means your down payment -- $17,000 --
would have grown to equity that equals $151,000. The growth
in your home’s value represents a return of 24% a year on your
Even if you subtract maintenance costs of 1% or 2% of the home’s value each year and throw in another 1% for higher insurance and utility bills, you’re still looking at a return of more than 16% a year.
But this calculation also comes with possible negatives:
|House hoppers won’t get all of the benefit.
Every time you change homes, you lose about 10% of the value to
selling and moving costs.|
|Out-of-control spenders can still lose. If you
drain off every dollar in appreciation through home equity loans and
lines of credit, you aren’t building wealth -- you’re destroying
|Home prices don’t always appreciate.
Sometimes they plateau or even decline. There have been periods in
several real estate markets where you would have been better off
renting and investing your down payment in the share market.|
COMPANY ANNUAL RETURN FILING FEES
Online Annual Returns are free.
If you file the return hard copy the fee reduces from $30.00 to $15.00.
McLEAN AND CO SEPTEMBER
2004 NEWSLETTER PAGE 5
Statistics show that 90% of businesses fail within 10 years. If
you've been in business for 10 years you probably don't have to read any
The reason for an overwhelming majority of business failures is faulty
financial management. This
includes “no financial management”. If you run your business by
‘gut feel' alone you are cruising for a bruising. Unless you are a
financial genius, it is statically proven that it is rarely possible to
stay in business running on ‘gut feel' alone.
So what is financial
management? Some will say
it's “ having enough cash to pay your bills ” and others say it's
about “ making a profit ”. Both are equally as
important. Cash can only
come from profits and profits can only come from cash . It is easier
than you might think to be making a profit… but not have any cash. For
example, you can get so involved in selling and making stuff that you
forget to invoice on time and collect debts quickly enough. Suppliers
will surely remind you of your obligation to pay them but customers will
never remind you to send them an invoice. You need a systematic approach
to debt collection and invoicing .
However, before you think about invoicing and debt collection, you need
to be sure that what you are selling is priced right . There
is no point in selling stuff at a loss in the long term.
How do you ensure what you are selling is priced right? The
first thing you need to do in business is to know what it's going to
cost to run the business and therefore how much you need to sell to
break even . Many businesses go horribly wrong, by plucking a figure out
of the air as a sales price and hoping they sell enough to cover costs.
This may work for a short while but will cause business death in the
Selling more at the wrong price and without good financial controls in
place can be a deadly business. Often when you sell something you don't
get paid immediately, so that the more you sell the more cash you need
to cover the increased costs until you get paid for the sale. In
accounting terms this is called the Financial Gap . While
you are making increased sales, your overheads are also increasing, and
if you don't get paid immediately you could find yourself in an
unexpected cashflow crisis. So,
before you embark on a business growth plan it is essential to also
incorporate a funding plan to ensure your growth is sustainable and
A vital part of any growth plan must be a budget . A
budget is a prediction of what you believe is achievable in terms of
sales and expenses for a future period (usually the financial year). A
budget is important because it helps you work to a plan. Budget
figures can be entered into most accounting systems and printed on a
Profit and Loss Report so that comparison can be made to measure how the
business is shaping up to the plan.
The following are the toll free
IRD numbers for phone enquiries. IRD have staff available to
0800 377 776
0800 377 772
General Business Tax
Payment Options for Overdue
Tax......... 0800 377
McLEAN AND CO SEPTEMBER
2004 NEWSLETTER PAGE 6
IS AN LAQC?
of the possibilities as an ownership vehicle of investment
property is a Loss Attributing Qualifying Company (LAQC). This may or
not be ideal depending on circumstances, and can provide flexibility in
the ownership structure. An
LAQC is simply a standard limited liability company, which takes on a
tax election, to give it Loss Attributing and Qualifying Company status
with the Inland Revenue Department.
This regime is only available to companies with fewer than five
shareholders. It was introduced to try to make the taxing of small
family companies similar to that of partnerships. It has provided an
excellent flexible structure for property investors.
Where there is a tax loss, as is
the case in many negatively geared situations, the tax loss can be
attributed back to the shareholders in the company in proportion to
their shareholding in the company. Thus planning prior to
the incorporation of the company is important, as there may be an
advantage in the highest income earner holding a major shareholding in
the LAQC to maximise the benefits of any tax losses.
An LAQC offers the possibility
to restructure the ownership of the company without necessarily
having to incur recovery of depreciation on sale of the actual property
Capital profits made by the
company on sale of property can be distributed to shareholders tax-free,
by paying an exempt dividend from the capital gain.
It should be remembered that
assets and liabilities of the LAQC are attached to the shareholders and
shareholders accept personal liability of any liabilities that the LAQC
may have e.g. loans, income tax liabilities.
AVOIDANCE INVOLVING LACQs AND THE FAMILY HOME
Inland Revenue has noted with concern that a
group of taxpayers are selling their private home to a loss attributing
qualifying company (LAQC), and then claiming tax deductions.
Selling your private home to a LAQC in order to claim a tax deduction for what are really private expenses, may be tax avoidance in some cases, says Margaret Cotton, of Inland Revenue.
"Unfortunately, some investment advisors are telling their customers that they can claim a tax deduction by selling their residential property to a loss attributing qualifying company, renting the property back from that company and claiming a tax loss," said Ms Cotton, National Manager of Technical Standards.
"Inland Revenue considers that such arrangements will often be tax avoidance for the purposes of income tax," she said.
Ms Cotton explained that Inland Revenue is currently considering several cases where a LAQC has been used to buy a residential property that the shareholders will rent as their residence. Even where a market rental is paid to the LAQC, a tax loss can still be generated to the advantage of the shareholders.
Where tax avoidance is proven, the taxpayer must pay the tax avoided as well as a penalty of 100% of the tax avoided. Use of money interest will also apply.
Ms Cotton says that if taxpayers are concerned about their position in respect of these arrangements then they should contact their local Inland Revenue office or seek professional advice.
McLEAN AND CO SEPTEMBER
2004 NEWSLETTER PAGE 7
CHANGES TO THE DEPRECIATION RULES
There are a number of specific
changes that are outlined in the depreciation paper, but the major
changes are as follows:
Life v Short Life Assets
The Paper draws a distinction
between assets that can be considered short life (i.e. plant and
equipment) and those assets that can be considered long life (i.e.
buildings) and suggests that short life assets might be better off being
depreciated on a double declining balance basis and that long life
assets are better off being depreciated on a straight line basis.
If these changes were adopted then the depreciation rates for buildings
would decrease, but depreciation rates for short rate assets would
There are proposals to change
the definition of depreciable intangible property so that certain
intangible properties will be depreciable without having regard to
whether it can be used for tax avoidance purposes.
The IRD are concerned that there
is an element of tax advantage for investment in residential rental
properties and buildings more generally. The concern has been
raised that the current method of calculating depreciation leads to
accelerated depreciation deductions on buildings and also that
residential property owners are claiming separate deductions for
different parts of a building such as electrical wiring, plumbing,
carpets and internal walls etc. To combat this the IRD have
proposed two options a follows:
A list of separately depreciable assets will be identified as is the
All assets will be depreciated as part of the building at the proposed
depreciation rate of 2%. The IRD argues there would be
advantages to the taxpayer as no valuations would be required and there
would be a wider scope for repairs and maintenance deductions on a go
The IRD have invited submissions
on the Paper.
HAPPENS IF YOU DON’T GIVE YOUR IRD NUMBER TO YOUR BANK OR EMPLOYER?
Your IRD number is the link
between Inland Revenue and your bank or employer. If you don't provide
your IRD number to your bank or employer they are required to deduct tax
at the no-declaration rate. This is presently 45% on salaries and wages,
and 39% on interest.
YOU OVERDUE IN FILING YOUR 2004 INCOME TAX RETURN?
We suggest you contact ourselves quickly if
you have not as yet provided
your records for the processing of your 2004 Income Tax Returns.
enable you to ascertain your tax position, pay any taxes on due date,
and meet your IRD filing requirements. We
are pleased to assist you in this service.
If we can assist further, please email McLean and Co. as follows:
CONTACT McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK
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